On August 9, 2011, SCOR SE, a global reinsurer with offices in more than 31 countries, acquired substantially all of the
life reinsurance business, operations and staff of Transamerica Reinsurance, the life reinsurance
division of2009
the AEGON
March
companies. The business of Transamerica Reinsurance will now be conducted through the SCOR Global Life companies,
and Transamerica Reinsurance is no longer affiliated with the AEGON companies.
While articles, treaties and some historic materials may continue to bear the name Transamerica, AEGON is no longer
producing new reinsurance business
Market Conditions Affect Term Pricing
By Jim McArdle,
Senior Vice President, Sales
and Marketing
The current economic crisis is challenging life insurers to look closely at all of the
products in their portfolio and make adjustments as necessary. While much of the focus
is on variable annuities and universal life with secondary guarantees, the performance of
term life is also affected by market upheaval.
In this issue of the Forecaster, Jim McArdle, Senior Vice President of Sales and
Marketing, discusses the impact of current market conditions on term life insurance with
Keith Dall, Principal at Milliman, Inc. Keith sees companies responding in a variety of
ways – looking for new financing solutions, tightening underwriting guidelines, monitoring
products and rates more closely and more.
Keith joined Milliman in 1998. He frequently presents at industry meetings and writes
for industry publications on a broad range of topics. Prior to joining Milliman, Keith was
chief actuary for American States Life Insurance Company. He received his Bachelor of
Science degree in Mathematics from the University of Southern Indiana.
Market and Financing
By Keith Dall,
Principal
Milliman, Inc.
Jim McArdle: In view of the financial crisis and its impact on capital markets
solutions, do you expect to see repricing by more term writers in the near term?
Keith Dall: It is a little early to see changes in the premium rates themselves, but
companies definitely are assessing the impact that current conditions, including financing
costs, have on their products. I think capital management solutions are a big concern
for the larger carriers. Certainly they’ve been pricing fairly small financing costs in their
products for the last few years. Now, with the change in the economic environment, they
no longer are able to get the financing costs that they used in their pricing. The fact that
they’re actively looking for other solutions, be it banks or hedge funds or reinsurance,
shows that reserve financing is at the front of their mind. Companies are scrambling now
with a lot of different challenges, but this is certainly up there among many other issues.
And down the road, if new financing solutions are not found, I think you are going to see
large carriers start to increase their rates.
Already we see closer monitoring of and adjustments being made to specific pricing
cells. This has become a big issue for term writers, especially given how easy it is for
independent brokers to find the lowest term rates in the market. A poorly priced cell
creates a hole through which companies can be selected against, and this can really
damage the profitability of a term product.
JM: The importance of term life in a company’s product portfolio varies from carrier
to carrier. Do you see companies questioning the ‘fit’ of the term product itself?
KD: To the extent that companies are questioning their product line, they are looking
much more closely at annuities and UL with secondary guarantees than their term
product. Normally, the way a company views a product – as a profit driver or more of a
loss leader or niche product – evolves over time. I don’t see major product shifts occurring
at this stage, but companies certainly are beginning to evaluate the impact each product
has on overall results.
Mortality and Underwriting
JM: Do you think companies are pricing
mortality aggressively in order to offer
competitive term rates?
KD: I would not say they are pricing
aggressively, but companies certainly do
not leave much, if any, conservatism in
their mortality assumptions. More and
more companies are looking at their
underwriting process, guidelines, their own
culture and distribution in order to get
the best mortality in the door. That said, I
think companies need to monitor ongoing
product performance more closely to make
sure expected and actual mortality are
in alignment. As an industry, we tend to
price our products, get them out the door,
start selling and then move on to the next
product development project.
JM: We’ve observed companies with
similar characteristics – product features,
target market, distribution, underwriting
guidelines – experience very different
mortality results. Do you see these
differences?
KD: Yes, I do. With the work we have
done on securitizations over the years, one
thing that has surprised me is that very
similar companies develop fairly different
expected mortality rates. I think this shows
that mortality is influenced by a number
of things not just underwriting guidelines.
Maybe it’s the underwriting culture within
the company, the pressure to increase sales
or maybe it’s the claims investigation.
It could be a variety of issues that are
impacting expected mortality.
JM: Do you see companies changing
their underwriting guidelines and then
running into problems getting the hoped for
results?
KD: This can happen with simplified
issue products where companies are dealing
with fewer underwriting tools to begin
with so changing one thing can have a
proportionally bigger impact on results.
There has not been a lot of protective value
work in the industry on simplified issue
underwriting, which is why companies need
to monitor this business closely and why
2
we have seen the competitiveness of certain
companies change over time. Also, little of
this business is reinsured so companies don’t
have the value of that perspective.
At the higher end, with fully
underwritten products, companies are
tightening up their preferred underwriting
guidelines to improve results. They’re doing
this in part to lower expected mortality
and support lower rates or even to justify
current rates. They are also doing it because
reinsurance rates have not been reducing
as quickly as they had been in the last
few years. In order to lower rates or even
justify the rates they have, companies
are tightening up preferred mortality
requirements like cholesterol count and
blood pressure.
JM: The growth of the older age market
presents new opportunities for life insurers.
Besides demographics, is the settlement
business also driving the growth?
KD: For term life, I think the growth
of older age business is largely due to the
demographics. This product is not affected
much by the secondary market. However,
companies do need to be careful that life
settlement brokers do not take advantage of
the length of their conversion periods.
By contrast, for UL with secondary
guarantees, there is no question that some
of the growth in older age business is due
to life settlements, and companies are very
concerned about this. In recent years some
companies have started pulling their UL/SG
products at the higher ages.
Also, there has been a good deal of
commentary in the industry press that could
be discouraging the sale of accumulation
life products to older age applicants. It’s
possible that this trend is helping to drive
an older age applicant to term life as an
alternative.
JM: Do you think any of the new
underwriting tools for older age applicants
demonstrate protective value?
KD: Virtually every carrier we have
talked to is working to improve the
competitiveness of their older age products.
Developing better tools to underwrite to
higher ages is part of that process. Some
experts believe that cognitive testing, which
has been used in the long term care market
for obvious reasons, offers an underwriting
benefit at older ages. I know that some larger
companies are actively using it. The theory
makes sense. It certainly seems like the
additional underwriting would help, but I am
not aware of any company having enough
experience to do a credible mortality study at
this stage.
Lapse
JM: What are your thoughts on current
lapse assumptions for term products?
KD: I think there are some lapse risks out
there that companies should be concerned
about, for both lower- and higher-thanexpected lapse rates.
For the last few years, most term writers
have seen their lapse rates decrease – a
reversal of an earlier trend toward higher
lapse rates. For several years, low cost
reinsurance enabled term writers to lower
premium rates, which gave agents a reason
to encourage policy replacement. Now that
reinsurance rates have steadied and direct
writers are taking a harder look at their own
profitability, premium rates are flat and lapse
rates have fallen.
The current economic environment
presents a totally different issue. Going
forward, lapse rates won’t be driven by
premium rates as much as by policyholders
potentially being unwilling or unable to make
payments. With the unemployment rate
increasing dramatically, insurers are going to
see some impact on lapse rates for all their
products. The length of the recession will
determine the magnitude of the impact on
lapse rates.
Lapse rates can be a mixed bag from
a profitability standpoint. For return of
premium products, a company that priced for
higher lapse rates than what the industry was
seeing may actually benefit from rising lapse
rates. Of course you would want those lapses
in the later durations, and most ROP products
have not been out there long enough to be
able to monitor the experience in the later
durations.
JM: We are just now getting shock lapse
experience for the first wave of 10-year level
term products. Are companies making out
better or worse than expected?
KD: The early studies show that
shock lapse rates have been lower than
industry expectations. Ten years ago,
companies were pricing in a 100 percent
lapse assumption at the end of the level
premium period. It has only been within the
last decade that companies have allowed
for some profitability after the level term
period and began assuming a shock lapse
of less than 100 percent with a loss ratio of
expected benefits paid to premiums received
to be less than 100 percent. So it will be
interesting to continue to monitor the
experience over the next few years.
Also, preliminary results show that
actual mortality is fairly high in the 11th
and 12th durations, but more experience is
needed to reach a definitive conclusion.
Regulation
JM: Circling back to the capital markets
and XXX reserve funding, what permanent
solutions might help term writers over the
next 12-18 months?
KD: I don’t see anything on the horizon
that suggests itself as the next capital
markets solution for direct writers. I’ve
worked on a few deals where companies
were looking into specific capital solutions.
Unfortunately, getting creditors comfortable
with the risks is a very difficult process,
especially in today’s environment. One
thing that could help the situation for direct
writers is principles based reserves, although
that is a few years away.
JM: The NAIC recently rejected an
ACLI proposal for uniform rules for capital
and reserve relief. Do you think state
initiatives will create competitive advantages
and disadvantages?
KD: It’s certainly a possibility. It only
takes a few states implementing new
reserving guidelines to create an uneven
playing field. However, I think that most
individual commissioners will prefer to wait
for further guidance from the NAIC, now
3
that it has ruled against uniform guidelines.
Term life products might conceivably receive relief from the NAIC sooner than later.
Everybody is aware there are redundant reserves for term, and it seems like a good place to
start giving companies a break from their balance sheet issues. However, I think the NAIC
has difficulty separating XXX reserving issues, because they are looking at solvency from a
total company perspective. I guess we will see how that plays out.
Looking Forward
JM: Any thoughts on the overall level of term insurance sales in 2009?
KD: I think it’s going to be a difficult year sales-wise since people have less money to put
into life insurance products. Term product lines will probably do better than some of the
accumulation products and long-term products with higher premiums, just because of the
amount of money that people will be willing to spend on life insurance.
I think there will be winners and losers. Insurers that have had unfavorable asset quality
or mortality experience will probably have to increase their rates, and their sales will
decrease significantly. Other companies will probably have trouble succeeding in the highly
competitive term market. A weakness in any one area, be it sales, lapse rates, asset quality,
mortality or expenses, can impact profitability and therefore a company’s competitiveness
going forward.
But there are a lot of companies out there that have done a tremendous job of
monitoring their business and underwriting to bring in a good pool of risks. These
companies should see their sales at least stay level and maybe even increase.
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The information conveyed and the views expressed in this newsletter are provided for informational purposes only and are based on opinions and interpretations made by
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